Inflation gauge; Private sector credit; Overseas economic data
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Inflation contained: Commsec
Inflation contained: The TD Securities/Melbourne Institute monthly inflation gauge rose by 0.2 per cent in September to stand 2.1 per cent higher than a year ago.
- Private sector credit (loans outstanding) rose by 0.3 per cent in August after a 0.4 per cent increase in July. Credit stands 3.4 per cent higher than a year ago.
- Term deposits lose favour: In August, term deposits were up just 0.2 per cent on a year ago – the slowest annual growth rate in a decade.
- China manufacturing: The final reading for the HSBC purchasing manager’s index in September was 50.2, down from the “flash” reading of 51.2.
- Japanese economic data: Industrial production fell 0.7 per cent in August (consensus forecast -0.4 per cent); retail sales rose 1.1 per cent over year to August (forecast +0.1 per cent). The purchasing manager’s index rose from 52.2 to a 31-month high of 52.5 in September.
What does it all mean?
- Inflation is well and truly under control. And given that inflation is the key factor determining the level of interest rates in Australia, it is clear that the Reserve Bank won’t have any qualms about leaving interest rates at 53-year lows tomorrow.
- While inflation – especially the outlook for inflation – is a major focus for the Reserve Bank, it can’t totally ignore other trends in the economy when it comes to setting interest rates. But there are a lot of contradictions. Lending is picking up, but from low levels, and generally consumers and businesses remain conservative about taking on debt. However there are other reports suggesting a lift in credit card and personal loan defaults. Home prices are rising, but from low levels. And the job market remains soft.
- Investors are moving on. Term deposits are clearly out of favour, with the annual growth rate the slowest in a decade. Yield-focussed investors are being forced to take on a little more risk to generate income and are now looking to other investments like housing, listed shares and other equities products. While some commentators blame investors for driving residential property prices higher, that is hardly an unforseen by-product of Reserve Bank efforts to cut rates and lift economic activity.
What do the figures show?
Inflation gauge:
- The monthly inflation gauge rose by 0.2 per cent in September after a 0.1 per cent increase in August. The annual rate of inflation was unchanged at 2.1 per cent.
- The underlying rate (trimmed mean) rose by 0.2 per cent in September after falling by 0.1 per cent in August. The annual rate rose from 2.2 to 2.4 per cent.
- Excluding volatile items like petrol and fruit & vegetables, the inflation gauge rose by 0.1 per cent in September after a 0.2 per cent fall in August. The annual rate rose from 1.6 per cent to 1.7 per cent.
- TD Securities noted that “Contributing to the overall change in September were price rises for fruit and vegetables, alcoholic beverages, and audio, visual and computing equipment and services. These were offset somewhat by falls in rents, new dwelling purchase by owner-occupiers, and newspapers, books and stationery. The price of automotive fuel rose by 1.0 per cent in September, while the price of fruit rose by 3.2 per cent.”
Private Sector Credit:
- Private sector credit (lending) rose by 0.3 per cent in August after lifting 0.4 per cent in both June and July. Annual credit growth rose from 3.2 per cent to a six-month high of 3.4 per cent.
- Housing credit grew by 0.4 per cent in August – the eighth straight 0.4 per cent monthly gain. Housing credit is up 4.7 per cent on a year ago, lifting further away from the 4.4 per cent annual growth rate recorded in May – the weakest annual growth in records going back to 1976.
- Owner occupier housing credit rose by 0.4 per cent in August to stand 4.2 per cent higher than a year ago. And investor housing credit lifted by 0.6 per cent in August to be up 5.9 per cent over the year (highest reading in 25 months).
- Personal credit was up 0.2 per cent in July after a flat reading in July and 0.3 per cent increase in June. Personal credit was up 0.9 per cent over the year – the strongest annual gain in 27 months.
- Business credit rose by 0.2 per cent in August after a 0.4 per cent increase in July and 0.5 per cent rise in June. Business credit is 1.4 per cent higher than a year ago.
- Of the monetary aggregates, M3 fell by 0.4 per cent in August – the biggest monthly decline in 44 months. And broad money fell by 0.3 per cent. Broad money is up 4.9 per cent over the year, the slowest growth in three years.
- Term deposits were up 0.2 per cent on a year ago – the weakest annual growth in a decade. But currency grew at a 7.7 per cent annual rate with money base up 6.8 per cent – both growth rates were close to the very long-term (30-year) average.
- The TD Securities/Melbourne Institute Monthly Inflation Gauge is designed to “provide a timely and accurate monthly measure of inflation in Australia”. The Bureau of Statistics only releases the Consumer Price Index on a quarterly basis.
- Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
- Financial markets believe that there is just a 6 per cent chance of a rate cut tomorrow, and that certainly accords with the latest economic data.
- The key question is how the Reserve Bank responds if inflation and lending remain very much contained but home prices continue to lift. If the Reserve Bank believes the lift in home prices is temporary, it will do nothing. But if the home price rally broadens, the Reserve Bank may have to think of alternate approaches of dealing with the risks involved. In NZ the Reserve Bank is about to introduce measures to limit low-deposit mortgage lending.
- Investors are scouring asset markets for ways to generate income. With interest rates super-low, term deposits have fallen from favour. While there will be more investors active in property markets, they will be instrumental in boosting both supply (new investment) and demand (purchases of existing stock).
What is the importance of the economic data?
- The TD Securities/Melbourne Institute Monthly Inflation Gauge is designed to “provide a timely and accurate monthly measure of inflation in Australia”. The Bureau of Statistics only releases the Consumer Price Index on a quarterly basis.
- Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
What are the implications for interest rates and investors?
- Financial markets believe that there is just a 6 per cent chance of a rate cut tomorrow, and that certainly accords with the latest economic data.
- The key question is how the Reserve Bank responds if inflation and lending remain very much contained but home prices continue to lift. If the Reserve Bank believes the lift in home prices is temporary, it will do nothing. But if the home price rally broadens, the Reserve Bank may have to think of alternate approaches of dealing with the risks involved. In NZ the Reserve Bank is about to introduce measures to limit low-deposit mortgage lending.
- Investors are scouring asset markets for ways to generate income. With interest rates super-low, term deposits have fallen from favour. While there will be more investors active in property markets, they will be instrumental in boosting both supply (new investment) and demand (purchases of existing stock).
